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Thursday, August 11, 2011

On Confidence

What are the Rules of this Confidence Game?

~ What is the role of confidence in our economy? In our policy-making? Hardly a day goes by without some pundit of dubious authority and even more doubtful expertise blathering on about the importance of confidence. Yet, too rarely does anyone stop the silly chatter long enough to ask a few basic questions, like:

Confidence in what?

Whose confidence?

What would create confidence?

Paeans to the importance of confidence are most frequently heard in the context of what must be done to invigorate our stubbornly moribund economy. We hear in particular how the "restoration" of business confidence is necessary before business will start creating jobs. During the bank bailouts we heard a lot about the importance of maintaining confidence in our financial system. And then there were dire warnings about the damage to investor confidence should the recent and appalling Kabuki over the debt ceiling not get resolved in a certain way.

Business, financial markets, investors—gosh! They need a lot of reassuring!

Yet there's a really important group whose confidence is almost entirely ignored—the American people.

Who is concerned with the confidence of the middle class? Of small businesses? Of wage earners? Of people on fixed incomes? Of the unemployed? Of those falling off the bottom of the economic ladder? People's confidence in the future has all but evaporated. Confidence in our political institutions, in all three branches of government, is at or near historic lows. Most are no longer confident that their children's future will be better than their own past.

This is the real crisis of confidence we face.

Meanwhile, our political leaders drone on about restoring confidence to big business, despite their record profits, historically low actual tax rates, and the laissez-faire fruits of an all-but-gutted regulatory apparatus. Similarly, there is ongoing anguish about providing confidence to financial markets, despite the utter freedom of capital to be moved at will about the world in search of the least regulated, lowest taxed, and cheapest labor markets (a big part of why corporate profits are so high.) Investors have never had it so good during such wretched economic times. Recent volatility notwithstanding, most of the moneyed class has done very well for quite some time, enjoying both the large profits and the small tax rates on capital gains.

If any of these people are lacking in confidence, it's not readily apparent.

The other thing they evidently don't lack is chutzpah. What they want, and what they relentlessly demand, is even more of the same—less regulation, more government subsidies, even lower taxes. They quite simply want more, more, more.

All the talk about confidence is just code for this simple fact: these players are motivated to protect and increase their financial gains, and are working our government to reduce their risk, backstop their losses, subsidize their operations, muzzle their regulators and slash their taxes.

They're not lacking in confidence—far from it. Their confidence is riding high from years of getting everything they want and the positive reinforcement of having their every need met the moment they start the hand-wringing routine.

Finally, it is not, as many have pointed out, a lack of confidence that somehow prevents business from hiring, it is a lack of demand, at least in the US. Demand is strong in many overseas markets (again, this is why profits are so robust) and indeed, many companies are hiring—overseas.

Small businesses, which generally do not have an international presence, are hurting from lack of consumer demand. So they're not hiring. Big businesses are sitting on record piles of cash, and no amount of tax breaks or regulatory issues are preventing their hiring more workers in the US. It's lack of demand.

Consumers aren't spending because they fear for their jobs, their retirements, their health, their kids' education. Real wages have been flat for more than 30 years even as many costs (health care, energy, food, education) have moved relentlessly higher.

The talk of confidence is a game. It is not the confidence of business or investors that should occupy our policy-makers. It is the confidence of the rest of us, and until we feel confident, the economy will continue to suffer.

Following the triumph in Washington DC for a new age of austerity, and the cascading service, benefit and job cuts that it will produce, we can be sure that consumer confidence will hit new lows. It is going to get much worse before it gets better.